We are seeing a huge increase in the number of contracts with seller credits. As a result, I am again blogging about the guidelines to avoid issues that surface repeatedly (the most common is when credits exceed closing costs).
I am also highlighting the most popular use for these credits: TEMPORARY RATE BUYDOWNS.
And our most popular buydown option lately has been the 1-0 buydown – due to its low cost.
A 1-0 buydown, which lowers a buyer’s rate by a full 1% for the first year of the loan, only costs about $3,100 for a $500,000 loan (or about $6,250 for a $1 million loan).
Once again, readers can estimate the cost of buydowns (and see the benefits) by using JVM Lending’s Rate Buydown Calculator. (Note: a buyer’s “savings” equals the “cost of the buydown/necessary credit from seller”).
Guidelines For Seller Credits
1. Amount Limits
A. Conforming: 3% of purchase price if down payment is less than 10%; 6% of purchase price if down payment is 10% or more. B. FHA: 6% of purchase price. C. Jumbo: Usually 3%. D. Investment properties: 2%
2. For Repairs
If a credit is specified to be for a repair either in the contract or addendum, the repairs will have to be completed prior to close of escrow. We will need to show proof they are complete, with either an appraiser’s or a licensed contractor’s certification.
3. Seller Credits Cannot Exceed Actual Closing Costs
Seller credits can cover both recurring (interest, insurance & property taxes) and non-recurring (title, escrow, appraisal, etc.) closing costs. Credits cannot, however, ever exceed actual closing costs, or they simply go unused. So, buyers should always get an estimate of total closing costs before negotiating large credits.
4. Credits Should Just Be For ”Closing Costs”
Seller credits can cover both recurring (interest, insurance & property taxes) and non-recurring (title, escrow, appraisal, etc.) closing costs. There is no need to specify which. Credits can simply be for “closing costs.”
5. Avoid Using Request For Repairs Addendum
It is well known that agents substitute “closing cost” credits for “repair” credits, to avoid disclosing repair issues. But, this should not be made too obvious by putting closing cost credits on a “Request for Repairs” addendum (even if the Request for Repairs addendum does not specifically note any repairs).
6. Make Sure There Are No Large Lender Credits Already
Credits cannot ever exceed actual closing costs or they simply go unused, as mentioned above. So buyers should always get an estimate of total closing costs before negotiating large credits – and they should account for any existing lender credits. Agents sometimes negotiate large seller credits without accounting for lender credits, resulting in combined credits that exceed closing costs.
7. Lenders Need Last-Minute Credits Before Docs Are Drawn
Many agents negotiate credits at the 11th hour before a transaction is slated to close. Lenders, however, need those credits before they order loan documents for several reasons. Getting notice of credits after loan documents are ordered often delays closings because automated approvals need to be re-run, closing cost limits need to be checked, and documents need to be updated.
